Sandra, the fraud investigator at Alpha Inc. is reviewing the latest fraud hotline calls, when one attracts her attention. it is a simple anonymous recorded message, received from an obviously distraught female, who insists that Alpha should take a closer look at the fire sprinkler contract given to Murphy Brothers Contractors. She states that it involves the warehouse renovation that was recently completed. She adds that she cannot be more specific for fear that the details may reveal her identity, but she sounds very sincere. Without any further hints as to what the reported fraud may entail, Sandra decides to investigate with a wide-scope examination, which she begins on March 13.sandra obtains Murphy Brothers contract. The contract requires Murphy Brothers to “Replace existing sprinkler heads throughout the warehouse area and install new 25-year-life sprinkler heads rated at 165 degrees Fahrenheit: $38,000.” Sandra notes that the contract was awarded to Murphy Brothers on January 3. Murphy Brothers was the low bidder in a fierce competition that involved a total of eight bidders. The second lowest bid for the installation of fire sprinklers was $39,000.
Upon investigating further, Sandra learns that 165 degrees is the normal temperature at which fire protection sprinkler heads are calibrated to open, so as to quickly extinguish small fires. She also learns that the renovated warehouse building will be used as an archive to store Alpha computer back up records, and a variety of administrative records.
During her examination of the contract, Sandra notes that contract specifications were changed on February 1 to provide for the removal of any 165 degree sprinkler heads that were already installed and to install 268 degree sprinkler heads throughout the new archive. The cost of the change – as estimated by Murphy Brothers – was $40,000. Murphy Brothers claimed that all of the sprinkler heads required by the original contract had been installed, and hence all would have to be removed and scrapped. New 286 degree heads would have to be purchased and installed.
Sandra is sceptical of the justification for this change and seeks independent professional advice. She learns that the use of the higher-temperature sprinkler heads in the records storage facility is appropriate. The use of 286 degree sprinkler heads for archival purposed is a national standard. Experience has shown that where records are being stored, the fire damage resulting from a small fire ranging up to 286 degrees Fahrenheit would be less devastating than the water damage that would result from sprinkler heads activated at 165 degrees.
Sandra reviews the receiving report, dated February 21, prepared when Murphy Brothers completed their work. John Green, the Alpha contract manager, signed the report. Sandra then visits the newly renovated warehouse site to inspect the installation. Inspecting the work that had been done is a relatively easy task. No records have yet been moved into the storage area and all the ceiling sprinklers are readily accessible. Sandra obtains the assistance of Robert Clark, and together they find a tall step ladder and begin to inspect the actual sprinkler heads that Murphy Brothers installed. They spend all day Monday inspecting 50 sprinkler heads selected at random throughout the renovated warehouse and make an interesting finding. Thirty of the heads bear the imprint 286F/2000, the year they were manufactured. Twenty of the sprinkler heads bear the imprint 165F/1980.
Based on the information provided:
A. Comment on whether Sandra should continue her fraud specific review of the Murphy Brothers contract. (5 marks)
B. If Sandra believes that she has not discovered any indication of fraud, comment on the discoveries she has made and speculate on why she would believe they are not indicative of fraud. (5 marks)
C. If Sandra believes that she has discovered one or more indicators of fraud, comment on what types of fraud you suspect could have occurred and why. Feel free to speculate. (5 marks)
D. For the fraud schemes that you indicated in part c, suggest what additional work you think Sandra should do to either validate the fraud indicators you noted, and/or what other action do you think she should take. (5 marks)
Final Case Problem 2
You are the auditor for the Bluebird Corporation. The Bluebird plant, located in La Crosse, Manitoba comprises many buildings which house general and administrative services, manufacturing operations, and shipping, receiving and warehousing functions.
Bluebird’s management has recently become sensitized to the corporation’s vulnerability to fraud, after hearing of experiences elsewhere, and you are instructed to devote some of your time to searching for evidence of it.
One day, in compliance with management’s request, you make a random selection of payment transactions. The first one you select for examination is a $5,000 payment that was made to the Aztec Company. You retrieve the purchase order that required the work that was done and find that it called for the following:
• Drain 5,000 gallon water tank atop building 12.
• Scrape and clean interior surfaces of tank.
• Rehabilitate surfaces as may be necessary.
• Coat all interior surfaces of the tank with Z-26 Sealant, an elastomeric water proofing and rust proofing compound.
• Refill tank with 5,000 gallons of water.
Perform and complete all work during plant vacation shutdown period August 1-14, 1990.